Why are so many companies, from huge public corporations to tiny LLCs, based in the tiny US state of Delaware, and what does the answer mean for American capitalism and corporate law? Chicago Booth Review editor-in-chief Hal Weitzman joins Booth’s John Paul Rollert to discuss his book What’s the Matter with Delaware?, in which he explores how Delaware staked out its dominant position in the world of corporate registrations and what the implications of its system are both within the state and for everyone else. The conversation was hosted by Booth’s Stigler Center for the Study of the Economy and the State and Student Life.
John Paul Rollert: When was the last time you thought about Delaware? Unless you live within a stone’s throw of Dover, possess a carcinological interest in horseshoe crabs, or are busy writing biographies of actors Aubrey Plaza or Ryan Phillippe, you probably don’t have much reason to think about Delaware, the first state to ratify the constitution and still, in terms of geography and population, one of the smallest states in the nation.
Yes, most of us don’t think very often about Delaware, but Hal Weitzman believes that’s a mistake—a big mistake, in fact. What’s the Matter with Delaware? is the title of his new book, and the subtitle tells us a lot about what he thinks we’ve been missing: “How the First State Has Favored the Rich, Powerful, and Criminal—and How It Costs Us All.” It’s a story that involves tax dodging, corporate shenanigans, regulatory capture, a bipartisan class of politicians deep in the pockets of the wealthiest interest in the world, and a state whose finances overwhelmingly depend on protecting this highly questionable status quo.
Clearly we need to be thinking a lot more about Delaware, and that’s why, with the support of the Stigler Center for the Study of the Economy in the State, I am so happy to have Hal Weitzman with us at the University of Chicago Booth School of Business for this episode of “The Book Report.” Hal, thank you so much for being here. Let’s start where you start at the beginning of the book: with a bit of a history lesson. So you tell the story of how just a little over a century ago, Delaware took the mantle from New Jersey as the “Mother of Trusts,” a decision that put it on the course to becoming this friend of the rich, the powerful, and the criminal. Tell us a little bit about that story.
Hal Weitzman: Yes, Delaware did take the title, the “Mother of Trusts” from New Jersey, but it didn’t kind of win it in a fair fight. And I do want to get to that history ’cause it’s important, but maybe if you’ll allow me, I can start with kind of telling a little bit of context about where Delaware is right now, and then we can get to the history of how we got to where we are.
So Delaware plays a critical role in capitalism, in the capitalist system. It’s a role that’s largely unexplored outside of academic journals, but this is a state, as you alluded to, that has fewer than a million residents. So population wise—and it’s the second-smallest state. Population wise, it’s about the size of Tucson or Grand Rapids, the metro area of those cities, but it has 1.6 million corporations registered there, including about two-thirds of the biggest companies, public companies in America. Most of the public companies in America and hundreds of thousands of private companies, also registered in Delaware.
Now most of these are out-of-state companies. They’re not actually located in Delaware, but they are registered in Delaware. And in fact, Delaware has a virtual monopoly on these out-of-state incorporations. So if you are going to incorporate out of your home state, you are very, very likely to end up in Delaware.
So what this means is that Delaware is everywhere. You know, this state, this second smallest state in the US after Rhode Island, is everywhere. And so most of us interact with a Delaware company at least once a day and usually a lot more than that. So maybe I can test that hypothesis just with our audience here. If you’re watching on the video, you can do the same thought experiment at home.
So let me ask you, let’s say in the past 24 hours, just by a show of hands and keep your hand up, how many people here have interacted with one of the following companies: Google? How many people have done a Google search? So maybe we should put our hands down and start again. Put your hands down. Let’s start again. Amazon? Prime or Video or any other version of Amazon? What about . . . so keep your hands up. Facebook or LinkedIn or Twitter, have you even looked at them? Have you checked any of those? What about Visa or MasterCard? Has anyone used a Visa or MasterCard? So if you’re watching the video, it’s pretty much everyone is putting their hands up, and of course I didn’t mention Verizon and AT&T and T-Mobile and Sprint, CBS, Walgreens, Walmart, Tesla, Chrysler, General Motors. And we could go on and on.
So Delaware is everywhere, and we are interacting with it all the time. It’s like the corporate air that we breathe. You just cannot get away from it. There are 1.6 million companies there, and it’s growing: 250,000 companies register in Delaware every year. That’s 683 on average every day. Most of these are not public companies. They’re private companies, LLCs: limited liability companies. So we can talk a little bit more about the significance of that.
Just one final thing before we get to history. This is a huge industry for Delaware. It accounts for 40 percent of Delaware’s state revenues. So Delaware collects more in corporate fees alone than 42 other American states collect in corporate income tax. So this is a huge business. So it’s the corporate air we breathe.
How did we come to this situation? As you said, Delaware stole the crown of incorporations from New Jersey. It didn’t win the industry because it had a better business model. In fact, what happened was New Jersey gave the industry up. So in 1888, New Jersey allowed the first holding company, a company could own another company and that allowed companies in New Jersey to own companies anywhere. So suddenly everything opened up and over the following decade, New Jersey relaxed all sorts of rules on companies, on corporate structures, on corporate activity. Previously it had been pretty tightly regulated, and suddenly everything opened up, and lots and lots of businesses registered in New Jersey. And so a third of New Jersey’s state revenues came from the incorporation industry, and lots of other states including Delaware copied the same rules that New Jersey had because they wanted to steal the business. But they weren’t able to do so. So it stayed in New Jersey.
Now, fast-forward a little bit to the election of 1913, which I know you’ll remember well, John Paul, being a student of history. There was a three-way race. So Taft was the president. He was fighting for reelection. Against him was Teddy Roosevelt, who had been a president. And Taft was a Republican. Teddy Roosevelt was standing for the Progressive Party, and then the Democratic Party candidate was Woodrow Wilson. And in this election, 1913, it was a heady time. It would’ve been a great time for the Stigler Center to be around because one of the big issues in the election was corporations. How do we regulate corporations? Where are we going with corporations? What should we be doing with them?
And during the kind of tussles that you get in elections, Teddy Roosevelt pointed the finger at Woodrow Wilson and said, “You’re not doing enough in your own state to reign in corporations. How would you do that in the United States?” And that criticism stung. At the same time, back in New Jersey, they were also getting a little bit jittery about this whole business, this whole incorporation business ’cause there’s a lot of concern about there being a kind of a race to the bottom in terms of standards. So both the Republican Party and the Democratic Party in New Jersey passed a resolution saying, “We’re gonna do something about this. We’re gonna investigate this.”
And so Woodrow Wilson wins the election and he has that period between the election and actually taking up office and he goes back to New Jersey with this kind of zeal to do something about incorporations. And he gives his state of the state address and basically says, “Let’s do something,” and the legislature springs into action, which is not something—that’s not a sentence you normally say, but they did and they passed a whole range of bills essentially to dismantle this industry. So they banned holding companies and they put all sorts of other restrictions in place, and the corporations fled New Jersey. Woodrow Wilson didn’t suffer any of the consequences of that. He went off to Washington to become the president, but New Jersey got rid of the corporations, or rather it passed these bills and the corporations left. And of course, Delaware was there with the same rules that New Jersey had now changed to welcome them with open arms.
So actually when I was researching this book, there’s a history professor at the University of Delaware who told me that they have a statue, or they had a statue in downtown Wilmington of Caesar Rodney, who’s their founding father. It got taken down with sort of a Black Lives Matter protest ’cause he was also a slave owner, you know. These guys were complicated. And he said to me, “You know who they should have a statue of? Woodrow Wilson ’cause he gave us this industry.”
So Delaware . . . the reason I tell these history stories in the book is Delaware is very aware of this history and it wants to make sure that it doesn’t do anything to jeopardize this really critical source of revenue. So it’s aimed to stay ahead of all its competitors by being as business friendly as possible, to the extent that before this event is over, you could file an application, set up a business in Delaware in 30 minutes. You can set up a business in Delaware. You don’t need any identification. You don’t need to go to Delaware; you can do it online. You don’t need any ID. And you don’t even need to put your name on it; you can make it an anonymous company, where the only contact given is the agent who registers you, and these agents register hundreds of thousands of companies. So it’s a generic name like, they actually . . . one of the most biggest ones is called Harvard, uh, I can’t remember what they called it, “Harvard Business Registrations,” which is a nice kind of acronym for one of our competitors at Chicago Booth Review.
Anyway, so they have this system now, very business friendly, and the result is you can set up an anonymous company in 30 minutes online. And by the way, the Secretary of State Office in Delaware, which is the way you have to go to set up this corporation, are so professional and private-sector like, it’s not like getting a permit here in the City of Chicago. They are open till midnight. So who do you think wants to file an application to create an anonymous company at 11:30 at night? Before midnight. So that’s the situation in Delaware.
John Paul Rollert: Well, in many respects, so you’ve given us a little bit about kind of the past, how Delaware came to take this particular position. But throughout the course of the book, you talk about this constellation of decisions around taxes and regulatory actions that ultimately lead to something they lovingly call “the franchise” within Delaware. What exactly is “the franchise”?
Hal Weitzman: So “the franchise” is not a phrase that I invented. “The franchise” is a phrase that they use in Delaware to refer to everything I just described, the incorporations industry and other stuff. Delaware . . . I say in the book that Delaware is the closest thing that you get in America to a registrar of corporate births, marriages, and deaths. It’s for corporate life events, right? So companies go to Delaware to be formed. Companies go to Delaware to merge, or acquire other companies, or to argue with other companies in court. And they go there to file for bankruptcy. So the franchise is all of that. It’s not just incorporations. It includes bankruptcy, which is a great business for Delaware.
It includes another really nice business, which is abandoned property. So abandoned property is if you, for example—my favorite example—got a gift card, which is very, very popular nowadays. You get a gift card, right? Most people don’t spend all the money on the gift card. On average, something like $7 out of every $10 get spent. The other three go where? They disappear. They don’t disappear; they go to Delaware, if the company is registered in Delaware. And some states take that—it’s called “escheat” is the legal term for that, abandoned property—or the same would be if you had, you know, if you signed up for like an online brokerage, TD Ameritrade, and you took the money out, but then another 5 cents went in there. That 5 cents goes to Delaware. And some states like Washington State—every state has abandoned property—but some states like Washington State actually keep that property and try to find the people who own it and give it back to them.
In fact, the origin of this industry, abandoned property, came because it was protecting the consumer from companies taking this money. So in Delaware, they don’t keep it in a special trust and try and find you. They spend it. That’s what they do with it, and that’s a nice business. It’s a $500 million-a-year business, which for a small state like Delaware is a great business. And there’s various other kind of related businesses.
So the franchise is all of that. And, like, the question that the franchise raises is why, why is there this franchise? Why do so many companies go to Delaware? When you ask people that question, why Delaware? Why does this thing exist? They typically will tell you one thing. So if they’re a lawyer, they’ll tell you it’s because of the chancery court. Delaware has a special court that no other state has, where you can hear business cases really fast. Or if the person works for the government in Delaware, they’ll tell you because of the Secretary of State. It’s so easy to file a company there. It’s so quick and it’s not very expensive. So they’ll tell you that. If you are into transparency campaigning, you’ll say it’s ’cause Delaware’s a tax haven or because . . . some other people will tell you it’s so easy to be anonymous in Delaware. And other people will say people go to Delaware because they just do, because they’ve heard that if you go out of state, you go to Delaware. It’s just done. For example, if you’re a foreign entrepreneur, non-American entrepreneur, and you want to set up a US company, some funders won’t fund you unless you’re a Delaware corporation. So you just go to Delaware, no real reason. So nothing succeeds like success, right?
And all of these are right, but there’s no one of them that is right. All of these are valid reasons why people go to and incorporate in Delaware, but no one of them explains all the 1.6 million companies that are there. And that makes sense. If you think about it, you’ve got companies going from Google, Amazon, Tesla to Joe Schmo LLC, a single person, and that’s a lot of them. So 70 percent of those 250,000 companies that incorporate in Delaware every year, 70 percent are LLCs. Many of them will be single-person LLCs, or even like single-use companies. In other words, people use them for a transaction of some kind and then they abandon them. They’re single-use companies. That’s not an official term. That’s just what I would call them. So there’s no way that the single-person, single-use company LLC would be attracted to Delaware for the same reason as Google or Amazon. So some are attracted by the court system. Some are attracted by privacy or secrecy. Some are attracted ’cause they were just told if they were gonna file in America, outside their home state, that they should file in Delaware.
Now, in its marketing materials, and there’s a lot, I encourage you to have a look through all the propaganda that Delaware puts on its website. If you look through that, they’ll say that it’s only about the chancery court. It’s about this division of corporations, which is extraordinary in its service. They actually have these special awards for service. They’re unlike any other bureaucracy perhaps in the world. So in their efficiency. And so Delaware will say that’s the reason that people come. In fact, they say on the website something like, “We’re like Bergdorf Goodman or Tiffany. People come to us for the quality of what they get.” And maybe that’s right. Maybe they are a bit like that.
But if you ask people in Delaware, why don’t you just put a question on the incorporation form saying “Who’s the owner of the company?” and then verify the information? They’ll say, “Well, because people will just go elsewhere.” In other words, they’re sort of admitting that at least some proportion of the people who are attracted to Delaware are attracted because it’s a secrecy haven. And in that sense, it’s the same as lots of other secrecy havens, like British Virgin Islands and Seychelles and Cypress and Bermuda and Panama, and wherever else. So anonymity is definitely a part of what attracts people there, and that’s part of what the franchise is.
But kind of the overwhelming way, the way I would describe, like, what drives the franchise is efficiency. There’s efficiency in everything about the business in Delaware. So as I said, you can set up a company in Delaware in 30 minutes with no documentation at all. It’s basically . . . the form is . . . I mean the cover of this book is the form, right? They were able to put the form. In fact, it was so small that they had to blow it up to fill the whole cover. And you see, my name is there, but I needn’t have put my name in real life. By the way, that is not my signature, if you’re gonna try and do any fraud. So you need more documentation to get a library card in Delaware than to set up a company. You need to show an ID to get a library card, but you can set up a company with nothing, not even your name.
So that’s one kind of efficiency, and then there’s tax efficiency. You can set up a holding company. Maybe we’ll talk about that. You can set up a holding company and avoid taxes in the US. And then there’s efficiency, speed efficiency. So if you do have to go to court, you go to court, to the special chancery court, and there’s efficiency there because in other states those corporate cases can take years, and in Delaware they’re very fast.
And even the lawmaking process, the process of making the corporate code, has been streamlined and made efficient in Delaware because basically they bypass democracy. And we can talk more about this, but I’ll give you the headline, which is the corporate code in Delaware, which is the corporate code for the United States and the world—because people either copy that code or they just use it directly because they are registered in Delaware—that’s written effectively by 27 people, and they’re 27 lawyers and they write it in private. They’re members of the Delaware Bar Corporation Counsel and they write it in private. And they’re not just sort of sages who come down from the mountaintop. They are serving lawyers. They’re working lawyers. In other words, they write the rules and then they appear in court under the rules that they have written. I mean, how more Stiglerian can you get than that? So they write the rules and then they give them to the legislature in Delaware. Well, the legislature in Delaware, which is the least educated, no offense but . . . Is anyone here from Delaware? I should have asked that at the beginning. The legislature in Delaware—which is no surprise, cause it’s tiny—the legislature in Delaware is the least-educated legislature in the country according to Pew. They have four lawyers in the legislature. None of them are really corporate lawyers. So they send it to the legislature. The legislature does not have the capacity, the ability to scrutinize the legislation. So they rubber-stamp it and they send it onto the governor, and the governor signs it, and it becomes law. And so they have bypassed, effectively, democracy, and that’s not me putting a spin on it.
In the book, I cite lawyers who are from Delaware, very respected analysts who have put this down in writing and written books saying exactly that, that they don’t want politics to disrupt the process, and we can talk more about that. So there’s efficiency in the lawmaking process.
So efficiency, I’m all for efficiency. I’m all for cutting red tape, getting rid of bureaucracy, but it begs the question, what is the cost of all this efficiency? And the cost is there’s a chronic lack of transparency. There’s no oversight. Identities aren’t verified. Legislation isn’t scrutinized. The state governments around the US are starved of tax revenue ’cause tax revenue that will be going to them is sucked out and taken and turned into lower cost fees in Delaware. And all of this enables a whole load of bad type behavior, like as you mentioned in the beginning: tax dodging, money laundering, the flow of dark money into our political system, and trafficking of drugs, of arms, and of people.
John Paul Rollert: Well, let’s talk a little bit about what’s on offer at this Bergdorf Goodman for the super wealthy and kind of corporate America. So you tell a lot of stories in your book that I find really entertaining and, frankly, somewhat infuriating about what Delaware allows for. And I wanted to give you a chance to talk about at least a couple of them. So tell us the story of Homer Depot.
Hal Weitzman: OK, so thank you. Homer Depot is a very clever pun on the word Home Depot. So Homer Depot is a character, like a mascot, that Home Depot invented. And he’s sort of a guy, cartoon character with a giant head and a bulbous nose and kind of an orange baseball cap pulled down over his eyes, and he’s the mascot of Home Depot. But Homer is also the name of the LLC that helped Home Depot dodge billions of dollars in taxes.
So in the 1990s, Home Depot created this Delaware subsidiary called Homer. And the way it works, this tax dodge works, which is called the Delaware loophole, is that Home Depot assigned to Homer, this LLC, all its trademarks. So believe it or not, Home Depot has trademarked the phrase “the Home Depot,” which is no surprise, but they’ve also trademarked the phrase “Where low prices are just the beginning.” So they actually trademarked that phrase, right? So they handed all that, all those trademarks to Homer, and Homer is a holding company based in Delaware, and all the 1,200 Home Depot stores around the United States have to pay Homer in Delaware 4 percent of their revenue for use of those phrases.
So previous to the creation of Homer, all those stores were just using the phrases anyway, but then overnight, they put the phrases in a different company, and suddenly all the stores in America have to pay 4 percent of their income, the gross income, to Homer in Delaware. So then there’s this tiny company, Homer. Now Homer had at its height four employees. Four. One is a lawyer, one is a paralegal, and two are administrative assistants. This company with four people that owns nothing except a few phrases by 2000 was making $2 billion a year. So all these stores are paying into Homer, and Homer has revenues of $2 billion a year in Delaware. Here’s where the loophole kicks in because Delaware doesn’t tax intangible profits, profits on intellectual property like phrases like “Where low prices are just the beginning.” They don’t tax that. So all that revenue comes in untaxed. And then of course, all the stores can write off that $2 billion in total because that’s a legitimate business expense.
So that’s the Delaware loophole, and that’s what happened with our Home Depot. Now, the reason that this became an issue is because the State of Arizona didn’t like the smell of that and they sued and they were able to win that case. But there are many other cases that they weren’t able to win. Actually, this loophole, the Delaware loophole is widely used, particularly by retailers. If you have a lot of income that comes in across a lot of states, this is a nice way to dodge taxes. So Toys “R” Us. Another example that I talk about through the book is Toys “R” Us is a shadow of its former self, right? But at one time, it was huge. I mean, I remember as a kid in the UK, when Toys “R” Us came to my town, Cardiff, it was like heaven. It was like we passed into another realm. And so Toys “R” Us was huge and they did the same thing. They had a giraffe—does anyone remember what the giraffe was called? Geoffrey. So what do you think they called their LLC, their holding company. They called it Geoffrey. So they did the same thing, and Walmart and Gap and IKEA and Victoria Secret have all done the same thing.
My favorite example of the Delaware loophole is WorldCom. So those of you who are a little bit more mature like myself will remember WorldCom. It was a telecoms company that was huge and then collapsed. And WorldCom was paying its holding company . . . it paid its holding company $20 billion over three years for use of its intangible assets. Now, the reason I like this example is ’cause the intangible asset wasn’t . . . they don’t have a phrase like “Where low prices are just the beginning,” but what they do have is management foresight. That’s their intangible asset: management foresight. What the hell does that mean? It means they think their management is so superior to other management that it’s an extra added value that is an intangible asset. So they paid this holding company, which somehow contained management foresight, $20 billion, thereby avoiding taxes. So that’s the Delaware loophole. I just think it’s full of wonderful . . . it makes for lots of wonderful stories.
John Paul Rollert: But these opportunities are not merely afforded to corporate America. They’re afforded to some of the wealthiest individuals in the world. Can you also give us a sense of how Delaware supports that great American pastime, tax avoidance, when it comes to wealthy individuals?
Hal Weitzman: Yes, so Delaware’s played a huge role in . . . I mean the bigger picture here is it’s about inequality, isn’t it? It’s about facilitating inequality, and particularly the inequality of what they would call in the tax-planning world “ultra-high-net-worth individuals,” but also the next level down, which is just the plain old high-net-worth individuals.
So my favorite example of this is probably the art market just ’cause I find art fascinating. It’s the biggest unregulated market in the world, right? And art dealers are not required to know the identity of the buyer. You know, when you watch the auctions, the buyers ain’t there, are they? There’s someone on the phone, and you never know who the buyer is.
In fact, I wanna mention this example, which is “Salvator Mundi.” There’s a wonderful documentary, I think it’s two, but one I really enjoyed about Salvator Mundi, which is the . . . may or may not be a Leonardo. Does anyone know what I’m talking about? It’s the most expensive painting ever sold—for $450 million in New York, and it was bought by Mohammed bin Salman, the crown prince of Saudi Arabia. But it wasn’t clear that he’d bought it actually for many years.
So the art dealers are not required to know the identity of the purchaser. They’re not required to ask where the money comes from. “Where’d you get that $450 million?” Is not a question they are required to ask. And actually, Tom Carper—who’s probably not gonna like this book ’cause he’s the senior senator from Delaware and has played a huge role in protecting corporate anonymity—so Tom Carper put out a report in 2020 that said—very timely now—that Russian oligarchs specifically use the art market to evade US sanctions.
So this is a market that’s dominated by uber-rich individuals. Museums are priced out of the art market. They cannot afford to buy paintings because people come in with hundreds of millions of dollars and buy them up. And these people buy art as an investment. They don’t buy it to look at it. So the days when people bought art and put it in museums have gone. So where does the art go? Well, it goes to warehouses, these climate-controlled, high-security facilities. And where do you think one of the biggest facilities is? Well, it’s in a factory outside Newark, which is a sleepy town—everywhere is a bit sleepy in Delaware, but Newark’s quite sleepy. And it’s a factory that used to make, you remember those foam packing peanuts, the things where you’d have the electronics packed in? This was a factory that used to make them. I guess they’re not environmentally friendly anymore.
So now this building houses some of the world’s most valuable artwork. And as I say, it’s all very high security. So this is how . . . and this building has been designated a free port. So free ports mean that stuff comes in and goes out to other free ports, and customs aren’t allowed to look at it. It’s like a free-trade zone, this former polystyrene peanut packing or manufacturing plant. So this is how it works. Auction houses in New York sell artwork. The sales tax in New York is almost 9 percent. So if you buy a $450 million painting like “Salvator Mundi,” you owe the state or the city $40 million. But of course you’re not gonna pay that ’cause what you’re gonna do is put it in a truck, drive it down 130 miles down to this facility in Delaware, and they will take it, and you’ve avoided all the tax, just like Amazon shipping something off to you—except Amazon you actually pay tax, so that’s not even a good example. So then when you get it into Delaware, you can put it in a trust. You put it in a trust and then you can pass it on to your heirs, and they don’t pay any tax. So the whole thing happens. It just removes tax revenue from the system and it accrues to high-net-worth individuals.
Now, Delaware doesn’t get a lot out of that business, actually. Trusts are not a great industry. You may have heard that South Dakota has a lot of trusts. That was in the Pandora Papers. South Dakota doesn’t make any money really on trusts. The total revenue to South Dakota is about $30 million—million. It’s nothing. It’s like packing peanuts. It’s nothing. But also all the benefit from that arrangement flows to the, I guess, flows to the auction houses, but it mainly flows to these ultra-high-net-worth individuals. Trusts are kind of a beautiful structure because nobody owns anything in a trust, right? So the person who put the assets into the trust says, “Well, not mine, they’re in the trust.” You may have heard politicians say, “It’s in a blind trust. “Nothing to do with me.” The trustee, the person who holds the trust, says, “Well, they’re not my assets.” And then the heir, the person who’s gonna . . . the beneficiary says, “Well, I don’t own that yet.” So nobody owns anything in a trust. It’s a beautiful system.
You could put a $450 million painting into a trust—I don’t think it is in Delaware, but it might be. Nobody knows ’cause that painting has never resurfaced. Will it ever resurface? We don’t know ’cause the other danger with that particular painting is it may turn out not to be a Leonardo, in which case it’s not worth anywhere near like $450 million, may not be worth $450. So there are wheezes like this. There’s lots of them. It’s just one example. And so what happens when you do that? You end up in a country where the 25 richest people pay an effective tax rate of 3.4 percent, People like Jeff Bezos, Elon Musk, George Soros. There’s years when they paid no federal income tax at all, through wheezes like this. So Delaware is not solely responsible for that, but it is a critical part of the what’s called “the wealth defense industry,” which is basically a giant industry that has sprung up to help the very wealthy to avoid paying taxes. Delaware’s a critical part of that.
John Paul Rollert: Well, obviously for those of us who are not intending to put multimillion-dollar pieces of art into a tax-free depot anytime soon—I will say for myself, I’m not one of those people—policies like these tend to frustrate and outrage. And yet in a moment, a populous moment in American politics, when it seems as though these are the very kinds of policies that would be under attack, there’s a peculiar quality of Delaware politics that seems to insulate it from change, and you call this “the Delaware way.” Tell us about the Delaware way, and this opportunity for bipartisanship that doesn’t seem to support anyone but those people making use of these kinds of art depots.
Hal Weitzman: Well, I mean, so hang on, that’s not quite right. It does benefit Delaware. So this is of huge benefit to Delaware, and that’s what drives the Delaware way. So who benefits from this system? Obviously the lawyers, obviously lawyers who are partner . . . are themselves high-net-worth individuals, some of them ultra-high-net-worth individuals, who are part of the system, argue the cases, collect the fees. Delaware lawyer fees are the highest per-hour fees in the country, higher than New York, higher than California, much higher than Illinois. So they certainly benefit.
But the taxpayers also benefit. So Delaware has very low taxes relative to other states. It has no sales tax. That’s how you can get away with the art dodge. It has no sales tax, and it has just generally a very low tax rate. So they say that Delaware is a blue spending state with red taxes. That means that if you include the entire franchise and all the revenue that flows from it into Delaware, the residents of Delaware only pay 50 cents for every dollar of services they receive. So this is a huge benefit to Delaware.
The costs, the costs don’t accrue to Delaware. We all pay the cost ’cause we, when our states lose taxes because of tax dodges like the Delaware loophole, we have to pay more. The State of Illinois is in a terrible situation financially and we are already paying for it or we’re going to have to pay, or our children or grandchildren are gonna have to pay for it. And that’s directly because of . . . if you look at corporate income tax revenue to states, state corporate income tax, it has collapsed. It’s collapsed over the past 50 years because of dodges like the Delaware loophole. So I just wanted to clarify: there is huge benefit to the State of Delaware. I don’t wanna suggest that there isn’t, and that’s partly what drives the Delaware way.
So what is the Delaware way? It’s this way of getting together, solving problems, solving issues, getting everyone around the table. Now you and I talked about the smallness of Delaware. There is a strong correlation between secrecy and tax havens and smallness. The Cayman Islands: small. Bermuda is small. Cypress is small. Even Switzerland is pretty small. Luxembourg is small. Delaware is really small. So it works to be small to be a secrecy haven. And why does it work? Well, because you can get everyone around the table in the same room and say, “This is what we are doing.” Everybody knows what everybody else is doing. And you can also say to people, “You know what? If you challenge this publicly, we’re all screwed because all those benefits that I talked about will go.” You cannot afford to even talk about this.
I say in the book that it’s not that Delaware is afraid of losing . . . it’s not the golden goose. People usually say that it’s the goose that lays the golden eggs. I dunno that the goose itself was golden. So it’s not that Delaware’s afraid of losing the . . . killing the goose that lays the golden eggs; it’s just afraid of even talking about the goose in case people notice it. Like, they don’t even wanna refer to it in case companies get scared and disappear. So the Delaware way has a positive side to it, and when Joe Biden was elected, you saw some of this in the media that people talked about bipartisanship and problem-solving and, you know, Joe Biden, that was all his thing. He spent, you know, however long, 35 years in the Senate representing . . . the longest-serving senator from Delaware. That’s his thing. That was his pitch. In the last election, he was basically, you know, “I’ll get everyone together and knock heads together and get stuff done.” It hasn’t worked out particularly well, but that comes from the Delaware way. It’s all about problem-solving. That’s the positive side of it.
And the negative side of it is it’s all about backroom deals. It’s all about squashing dissent because nobody dare disrupt the system because we all know that we all benefit from the system. And the result of that is that you just, you end up supporting this corporate anonymity and lack of transparency and this system where the fox guards the hen house with the Delaware Bar. The lawyers who serve in the courts writing the rules under which they’re going to serve. So there’s no transparency in decision-making, no transparency in who owns the companies that are created in Delaware.
And sometimes you might feel like banging on about transparency sounds like a radical or liberal thing, liberal critique, and it really is not. I mean, again, this is very Stiglerian. Transparency is not a liberal idea. We need transparency to make the economy and democracy work effectively. Transparency helps capital formation. Transparency helps price discovery. It helps us work out what the correct prices are. The more information we have, you wouldn’t get more Chicago Booth than that. Transparency helps regulation and transparency helps voters because they will know who’s behind, who’s funding political campaigns, who’s receiving money. So transparency is not a liberal idea. It’s an idea that helps financial markets function better and helps democracy function better, and Delaware has stood against all of that and has not just stood against it passively, but it has actively tried to shut down efforts to increase transparency in the system.
John Paul Rollert: Well, one of the interesting things is this kind of remarkable bipartisan consensus that supports the Delaware way. For you, that has led to, and I’ll quote you here, “Delaware perfecting the model “of the political-economic idea of capture.” Can you explain that idea for us and tell us why Delaware appears to be kind of the paragon of that model of governance?
Hal Weitzman: Yes, and once again, we’re returning to Stigler, which is great for a Stigler Center event. So Stigler is famous in part for coming up with the concept of regulatory capture, and the concept was or is that regulators come to be captured by the groups that they’re regulating. So interest groups come to control lawmaking. They come to control regulation of their own sectors. And regulators effectively become kind of lobbyists for the industries that they’re supposed to be regulating. So that’s how it works, and that is evidently how it works. They shape the rules of the game. They shape them through lobbying, through fancy dinners, and wining and dining, and all the other things that lobbying entails. Delaware has taken that system and institutionalized it. It’s gone to the next level. So the lawyers don’t need to lobby the lawmakers to change the corporate code. They just change it themselves through this committee. So they’ve perfectly institutionalized this idea of capture. They’ve gone beyond it by saying, “We don’t need to lobby the legislature. “We just tell them what to do.” The system’s effective. It’s efficient. It works really well. It’s just not democratic. There’s just no oversight.
John Paul Rollert: Well, I mean, I have to say in many respects for me, Hal, listening to you talk here and having read the book—a wonderful book, but it left me a little depressed because it seems to capture in many ways how this incredibly consequential state has shaped the activities of the wealthiest individuals on the planet, the mightiest corporations, and I would suggest maybe not for the better. So you can disabuse me of that one, but if that is true, is there a kind of allegory of sorts in Delaware that gives us a larger story about the state of contemporary American capitalism right at this moment?
Hal Weitzman: Well, we talked a bit about inequality. I think there are some reasons to be optimistic, but maybe I’ll save those for the end ’cause it feels like a good rousing kind of end ’cause there’s some interesting stuff happening, which I don’t wanna forget about—not in Delaware, but there’s some interesting stuff happening in the world, which is feeding into this. So what I would say that . . . in terms of like an allegory, what does this tell us about American capitalism?
There are lots of headline-grabbing scandals that involve Delaware, you know, really like hideous stuff: human trafficking, arms smuggling, bribery and corruption. And Delaware will always say, “That’s a few bad apples. It’s just a few bad apples.” Of course, the end of that phrase is “The few bad apples spoil all the other apples.” That’s kind of what, but anyway, in America, that’s taken to mean it’s an anomaly.
There’s this debate at Chicago Booth between two of our Nobel laureates, Dick Thaler and Eugene Fama, about anomalies in the stock market, anomalies in stock prices. And Dick Thaler describes it as, you know, “I think it’s the tip of the iceberg,” and Eugene thinks it’s the whole iceberg. So we don’t know if it’s the tip of the iceberg, these scandals are the tip of the iceberg or they’re the whole iceberg. They’re not the whole iceberg, clearly, but when you have a world where nobody identifies themselves in creating LLCs in Delaware—and by the way, I should say there’s a distinction between LLCs and all private companies and public companies in the sense that we require a lot of information from public companies, but we require none from private companies.
If you follow this at all, the SEC, which is currently dominated by Democrats—three Democrats, I think, to one Republican at the moment—SEC commissioners have talked a lot about the concern about the privatization of the American economy. So I’ll just give you one little interesting data point from that. There’s a not-very-well-known index called the Wilshire 5000, the Wilshire 5000. Well, there are not 5,000 stocks in America that you can put in the Wilshire 5000. There’s only three-and-a-half thousand because so many companies have been taken private. So there’s a huge amount of darkness, and that mirrors what’s going on in Delaware.
But what I would say is this: it’s not really the scandals that are the bread and butter, what Delaware does. It’s not the headline-grabbing stuff. It’s the kind of more quotidian protection of assets, of vested interests. That’s sort of what really grinds the system down. It’s the day to day. It’s actually not necessarily the ultra high net worth. It’s more the high net worth. To be honest, I was saying to someone today, it’s more the kind of dentist in Naperville who files an LLC in Delaware and does some other jiggery pokery because his accountant told him it may be a good way to avoid taxes. That’s probably what most of it is. It’s not child trafficking. It’s mostly that other, more sort of less exciting stuff, which because it’s less exciting, like Delaware itself, it flies under the radar.
Well, Delaware isn’t exciting, and that’s where stuff happens. So it’s very easy to point the finger. If you think about these secrecy jurisdictions, it’s very easy to point the finger and say, “It’s the British Virgin Islands. “It’s Bermuda. It’s Cypress.” It’s always happening over there. It’s never happening here, but it really is happening here, and it’s happening, not anywhere exotic or glamorous, but in Delaware of all places. And there was . . . when Barack Obama was running the first time, he talked about this place, Ugland House, which is a building in Grand Cayman, the Cayman Islands, that is this very attractive, five-story, white Cayman Islands building, white building with sort of red terraces. And he said, here’s a building in Del—I’m turning into Joe Biden, mixing up my places—here’s a building in Grand Cayman that has, he said something like 8,000 companies registered there. Well, that’s either the biggest building in the world or there’s something funny going on. Well, guess what? In Delaware, there is a squat, one-story, brown building, 1209 North Orange Street, that has 300,000 companies registered there, and it is not the largest building in the world. So maybe there’s something funny going on there, but funny enough, he didn’t mention that when he was running with Joe Biden.
One other thing I’d say about like in terms of an allegory, just like the gap between the rich and poor, the inequality, it’s much more mundane. That’s why I mentioned the dentist from Naperville. It’s much more mundane and less glamorous than we sort of think it is. When we think of the inequality, we tend to think of the Musks and the Buffets, but really inequality in a sort of granular level is more like the dentist from Naperville who owns a couple of offices and sort of the middle-class worker.
John Paul Rollert: Well, I’ll be sure to ask my dentist about his LLC, but before I do, because I’m still—He is not in Naperville. Maybe his LLC is. I’ll have to check—but by way of a closing question and to bring me out of my depression here, give us some rays of hope. You’ve kind of, again, you’ve told us a story that I think is too familiar to many of us about the ways in which the rich, the powerful, and even the criminal seem to get away with so much, and the first state seems to enable that. Are there any rays of hope, either within the first state or beyond it that you can perhaps leave us with?
Hal Weitzman: Yes, there’s a lot. There’s quite a lot. So I know we wanna get through this. I’ll be quick. So things are moving in the right direction—not for a good reason, unfortunately, but the outcome is good. So some background: In 2020, the Congress, the US Congress passed an act called the Corporate Transparency Act. This is the first time that companies will be—that are formed in America and that have formed in America—will be required to identify who actually owns the company. And they’ll actually have to say who owns it. They will have to file that with the federal government. Now, the system has not been implemented yet. It’s very delayed. That registry is supposed to be set up in 2023. It is not looking good. It’s been very, very delayed, and Janet Yellen was asked about it recently and was sort of obfuscating a little bit. So we will . . . this is a big step forward. This is important, but there’s a lot of problems with the rules as they are being written.
First, it’s not gonna be public. It’s gonna be private. So the only people who will be able to see it will be the Treasury, FinCEN, the Office of Criminal Investigations in the Treasury, and other law-enforcement-type agencies. So it’s not gonna be public. It depends on the companies to self report. So they have to file . . . so you’re gonna have to fill out a form in Delaware or wherever to incorporate. Then you’re gonna have to fill out another form with the federal government. It’s not clear what the time period is between those forms, but you can already see that we are setting up a bifurcated system that it allows a lot of stuff to fall through the cracks.
There’s a loophole for trusts, so at the moment, trusts are exempt from this legislation. They do not have to identify their owners. Bear in mind that quite a lot of trusts had been used by Russian oligarchs to buy all sorts of assets in the United States. The Treasury does not have enough funding to verify the information that it’s gonna be given. So the Treasury now gets nothing, no information about who owns US companies. This would envisage that there are millions and millions of companies in the United States, with 2 million companies getting formed every year. So all of that information is suddenly gonna be dumped in an office that currently has 300 people. Then Joe Biden asked them to increase the funding so they have 400 people. Great. They cannot currently go through all the red flags they’re getting from the banking sector about their customers and concerns about money transfers there. S, there is not gonna be enough capacity at the Treasury to verify the information or dig into it.
And it also depends on government agencies cooperating. Well, we know that that just doesn’t happen. So there’s a lot of reason to be skeptical about that, but it is a tiny step forward. But more recently, there’s some very exciting news, which is unfortunately driven by the war in Ukraine. As you know, all sorts of countries in the west have said, “We are going to sanction Russian oligarchs.” That’s actually been going on for several years, as you know, but it’s been ramped up in the past few months. The problem is we don’t know who owns the companies in America. So we don’t know how many Russian oligarchs have money here and what they’re doing with it. We know that there are some, and very occasionally they’ve been caught. There’s one who’s been caught in Washington, not because of any filing, but just because the Washington Post dug around and found his neighbors and found out they bought the house.
So that has forced a new sense of urgency, which is terrible because of the reason, but very exciting because stuff is starting to happen, John Paul. So in New York, there is right now a proposal could be voted on in the next few weeks to require all companies including trusts to identify their owners to the State of New York at the point of registration, which has never happened before. And Delaware has always said, “Well, if we do that, the companies will go elsewhere,” and I would say to that, “Well, why don’t you do it ’cause the stuff that will go elsewhere is the dirty stuff that you say you don’t want. Why don’t you keep the clean, flush out the dirty, let it go to Wyoming or wherever.” But of course they don’t wanna do that because that’s a huge revenue driver.
And there’s also the same proposal in Alaska, which is a huge home of trusts like South Dakota. So very exciting stuff happening. So I hope that, I mean, I’m very excited about the New York one. The Alaska one is not gonna come up for a vote until next year, but the New York one, it could be there in the next month or so. We suddenly have the first state in United States say, “We want to know who’s owning the companies in our jurisdiction.” And that could put a lot of interesting pressure on Delaware to follow suit. So I think there’s a lot of reason to be optimistic that we are suddenly aware of this.
There’s a colleague of mine at the university. Kimberly Kay Hoang in the sociology department has written a book called “Spiderweb Capitalism.” There are these spiderwebs that are all over the world. I don’t mean to suggest they’re just in Delaware, just the United States. They’re in all the places that I mentioned, but Delaware is a critical part and node. It’s a cog in that big system. And that system is starting to come under scrutiny like never before in the UK, in the European Union, and hopefully here in the United States as well.
John Paul Rollert: Well, I can say your talk here as well as your book left me convinced that the answer to what’s the matter with Delaware is a lot. So I’m glad to hear that there are good reasons for optimism, and Hal, it’s been wonderful having you here. Thank you so much for joining us.
Hal Weitzman: And for the questions and for your interest.
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